The FT-SE 100 rocketed to a record 5,629.7 on Friday, the sixth record in eight trading days. The index surpassed the last record set in October, as well as eclipsing the average year-end target of 5,500.
According to the estimates of 12 strategists polled by Bloomberg News in December, the index was expected to climb by about 450 points for the whole of 1998. Instead, the FT-SE 100 jumped 430 points during the last two weeks, and is expected to march even higher on speculation of further takeovers.
"We've upped our estimates. There is more merger and acquisition activity to come, particularly in the financial sector," said William Davies, head of asset management research at Albert E Sharp, which controls about pounds 4.5bn in UK equities.
The fund manager yesterday raised its year-end target to 6,000 from 5,500. NatWest Markets' strategists also upped their 1998 forecast to 6,000 from 5,700 while Goldman, Sachs increased its estimate to 5,850 from 5,500.
On Monday, the FT-SE 100 jumped more than 140 points, or 2.6 per cent, after Glaxo Wellcome and SmithKline Beecham said they were in merger talks with a view to creating the world's largest drug company. The move fanned talk of more corporate activity, and not just in the pharmaceuticals industry.
British stocks reached records last year on speculation that the UK bank and drug industries were ripe for consolidation. The introduction of the European currency, the euro, in 1999 is increasing the pressure on companies to find a partner or perish, even though the British government has opted out of joining the euro. Expectations that borrowing costs will not rise anymore are also helping to boost British stocks.
There was concern earlier this year that the British economy was growing too fast - even after last year's five interest-rate increases. Recent economic bulletins, however, sparked optimism that inflation is not a problem and that interest rates are not about to rise.
"The economic background still looks good," said Peter Cartwright, a UK research analyst at Williams de Broe. "The likelihood is that we'll shift our target of 5,600 in the wake of a SmithKline-Glaxo merger and stable interest rates."
The Office for National Statistics said on Friday that manufacturing output dropped 0.5 per cent in December from November against expectations of a 0.3 per cent increase. The report lent credence to the Bank of England's move to hold its benchmark interest rate at 7.25 per cent this week.
Some strategists are sticking to their guns. Gareth Williams, a UK equity strategist at ABN Amro Hoare Govett, said his prediction of 5,000 for the end of 1998 still stands.
"We'll stay where we are. All the reasons for our forecasts are still in place," Mr Williams said. "There are still risks of earnings downgrades."
The combination of last year's interest-rate increases, the strength of the pound, which cuts into exporters' earnings, and Asia's recent economic slide may mean British company earnings will disappoint.
Credit Lyonnais Laing's Savvas Savouri is also not budging from his year- end 5,600 prediction. While financial companies and drug stocks may continue to benefit from takeovers, other British companies may not fare as well.
"There's a lot of pent-up bad news," Mr Savouri said. "Despite the fact that the FT-SE will probably overshoot our target, it probably won't stay there long. Disappointments may come during the results season." That starts next week.
Other strategists adhering to their predictions include Merrill Lynch, which kept its 6,000 year-end target set in early January. Morgan Stanley, Dean Witter, Discover & Company also held their 6,000 prediction while Societe Generale Strauss Turnbull maintained its 5,350 year-end target. UBS last raised its target to 6,300 in early January from 5,600 in December.
This is not the first year in which analysts have been wrong-footed by the movement in the market. In 1997, the FT-SE 100 jumped 24 per cent to 5,040, against expectations at the end of 1996 of a 5-7 per cent climb.
Some investors are getting restless as a result of fund managers taking too cautious a stance on the market. There were reports last week that pension fund managers Gartmore and PDFM, which is owned by UBS, have lost mandates with a combined value of at least pounds 2bn since the autumn, as clients have lost patience with their managers' pessimistic views.
The two fund managers, which together control more than pounds 90bn of pension fund money, have taken large cash positions, in the belief that stocks are heading for a downturn. This week, they lose the pension fund business of National Australia Bank, the owner of Yorkshire Bank and Clydesdale Bank, for which Gartmore and PDFM have controlled an equity fund valued at pounds 800m; PDFM lost a pounds 1bn contract at Railpen, the railway employees' pension fund, a few days after UBS and Swiss Bank Corporation announced they were merging.
Several local authorities, including the four London boroughs of Ealing, Richmond, Bromley and Tower Hamlets, are also reviewing their contracts with the two companies.
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